No More Approval Letters Without Properties

Under the new RESPA rule, a lender cannot perform income, asset and credit verifications until the prospective borrower has received a Good Faith Estimate, Patton Boggs LLP Partner Rich Andreano told MortgageDaily.com in a telephone interview. Andreano is a RESPA expert with nearly 25 years’ experience who advises mortgage bankers, mortgage brokers and other providers of mortgage-related services about regulatory compliance and transactional issues.

He said HUD was asked about revising the GFE when the property was not initially identified and the prospective borrower subsequently selects a property with significantly higher costs such as property taxes.

“They said no,” he said.

If a GFE was issued before all of the application elements — including details about the property — were received, HUD will deem that such information had been collected when the GFE was issued.

“So when that information later is determined, they select a property, that is not a basis to issue a revised GFE,” he said.

Andreano explained that HUD’s position is that verifications cannot be performed until the borrower has been provided with a GFE. But if a loan commitment is issued and the property costs vary significantly — the lender cannot revise the GFE.

“What you can’t do before the consumer gets a GFE in their hands is you can’t ask them to give you any verifying documents, nor can you ask them to give you authority to verify,” he stated. “The lender would be stuck with the cost estimates in the GFE.”

In such a situation, the lender would be obligated to pay the difference in the taxes and fees.

He added, though, that the borrower still has to qualify for the loan. So the lender wouldn’t be obligated to fund the loan if the higher costs caused the borrower not to qualify.

Andreano noted that in today’s real estate climate, this hasn’t been much of an issue. It would have been an issue, however, in the frenzied real estate market of a few years ago when real estate brokers were presented with multiple offers — some with pre-approval letters.

When the market eventually recovers, formal pre-approvals won’t exist anymore.

“Unfortunately, a rule that was meant to help consumers could have a anti-consumer effect,” he said. “I think it’s something that the policy folks over at HUD will need to take another look at.”

But less formal, “back-of-the-envelope” pre-qualifications won’t be impacted and will still be available, Andreano added.

He speculated that the size of the earnest money deposit might replace formal loan commitments as a major determining factor for sellers and their agents in the future.

Lenders One Mortgage Cooperative Chief Executive Officer Scott Stern said in a telephone interview that many companies do not yet know how they will handle this issue and are looking to FHA for guidance. But it is “a major concern.”

Stern noted a number of the new GFE’s shortcomings — including that it doesn’t list the total payment or the actual cash needed to close nor does it need the borrower’s signature. He said that while FHA doesn’t require a new GFE when closing costs drop, some correspondent lender do — which is delaying commitments and closings.

“Somebody said to me, ‘the Good Faith Estimate fails to give the customer the two things they want the most,'” Stern said. “They want to know what’s their payment and what’s their downpayment.”

Stearn called for a summit between FHA, lenders and servicers to address many of the GFE’s issues.

While Bank of America, Chase, Citigroup and GMAC all declined to comment, a MetLife Home Loans spokesman indicated that their policy has always been not to provide loan commitments without a specific property. Andreano said this was the best position to take.

Author and journalist Peter G. Miller, who covers real estate issues at his site OurBroker.com, said that while “some lenders are taking the most conservative position possible, arguing that pre-approval and pre-qualification letters are essentially banned by the new rules,” others have taken a different position.